Renewable Identification Numbers (RINs) that are part of the federal biofuels program may help ease the market price pressure of a short corn crop, analysts told Reuters News Service this week.  RINs are certificates used by refiners or fuel companies to demonstrate they are meeting their government mandate to use a set amount of renewable fuel every year.

Each RIN is a unique 38-character code that is assigned by an ethanol producer to each gallon or batch of fuel.  When the fuel is sold to an oil company that blends the ethanol with gasoline, the RIN can then be “retired” to regulators, or sold on the market.  But, RINs also serve a second function as a kind of relief valve in the event of a one-off crop crisis or price spike.  If an oil company buys more ethanol than its minimum blend quota, it can keep about a fifth of those credits to use the next year.

Oil firms with surplus RINs could use those paper credits in lieu of buying physical ethanol next year, ultimately reducing demand for corn to make the fuel.  Because the role of RINs is not widely appreciated, some analysts believe USDA may be overestimating corn-for-ethanol demand by as much as 10 percent.  “The general view is that there is a floor, or a minimum, for demand for corn for ethanol,” Nick Paulson, an assistant professor in the University of Illinois’ agriculture and consumer economics department, told Reuters.

 “We wanted to show that there’s this bank of RINs that has been building up so that, if we got into a situation in which blending became unprofitable, these companies could meet a portion of their mandate through RINs.  This will come into play in a major way for 2013,” Paulson said commenting on a study he did earlier this year.  That “floor” is now the topic of intense debate in the grains market as traders look for signs that near-record prices are slowing demand for corn.  Weekly ethanol production has dropped by more than 9 percent since mid June to the lowest in more than two years, according to data Reuters analyzed this week.

RINs were intended to create a degree of flexibility within the system, allowing companies like refiners to small fuel importers to meet as much as a fifth of their ethanol quota using surplus RINs from the previous year or borrow the same amount against the coming year.  Firms can also trade RINs on a secondary market if they need more.  Nearly 3.5 billion gallons worth of 2011 RINs have not yet been used, Environmental Protection Agency data shows.  Of those, some 2.6 billion are eligible for use against this year’s 13.20-billion-gallon renewable fuel target.  Converted into corn, that is 1 billion bushels that oil companies would not need to buy this year if they choose to use up their stockpiled RINs.

With first-half ethanol output strong and inventories high, few analysts expect them to erode that paper surplus this year, even with some producers now closing plants and cutting output.  Prices for 2012 RINs have surged this month as blenders sought to ensure they maintained a healthy ending stock for next year.  Prices trebled to some 4 cents a gallon over the past three weeks as corn prices have moved to record levels, the report noted.

Ethanol prices are currently about 25 cents per gallon less than gasoline, down from a more than $1 discount in April.  “Part of the problem for (ethanol) margins is that there is not that much demand but plenty of supply,” said Bill Day, spokesman for Valero, which owns both ethanol plants and refineries.  Valero is one of several companies that has shut some ethanol production.  The last time ethanol was significantly more costly than gasoline was in late 2008 and early 2009–a period in which RIN prices surged to more than 16 cents as blenders bought coverage for a production shortfall.  Oil companies also have a second reason for wanting to maintain a maximum surplus of RINs for 2013.  That is, as the fuel blending mandate rises another 5 percent next year, many fear they will not be able to sell enough ethanol-blended gasoline to meet their target.

“There’s an incentive now for companies to carry forward RINs into the coming years in order to cover themselves when the blend wall comes into play,” said Pat Westhoff, director of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.  “The market would not be happy if we ran out of RINs.”

 

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